On January 1,2015,Carmello Corporation purchased 5% bonds with a face value of $50,000 for $42,000.Carmello Corporation intends to hold the bonds until the maturity date of January 1,2025.Interest is paid semiannually on January 1 and July 1.What journal entry(ies)is(are)prepared on July 1,2015?

Question

Quizplus · Accepted Answer

On July 1, 2015, Carmello Corporation will receive the semi-annual interest payment of $1,250 ($50,000 x 5% x 6/12). Therefore, the following journal entry is prepared:
Debit Cash $1,250 and credit Interest Revenue $1,250
In addition, since the company follows the held-to-maturity accounting method, the interest revenue should be adjusted to exclude the amortization of the discount on the bond investment. The discount amortization can be calculated as ($50,000 - $42,000) / 20 = $400, where 20 is the number of semi-annual periods until maturity. Therefore, the following journal entry is also needed:
Debit Held-to-Maturity Investment in Bonds $400 and credit Interest Revenue $400
Overall, the journal entry on July 1, 2015 should be:
Debit Cash $1,250 and credit Interest Revenue $1,250
Debit Held-to-Maturity Investment in Bonds $400 and credit Interest Revenue $400

On January 1,2015,Carmello Corporation Purchased 5% Bonds with a Face